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15/08/18

The Increased Need for RegTech

Acclaimed to be the “new Fintech” by Deloitte, Regulatory Technology or otherwise known as RegTech is the most promising branch of technology that has come out of the FinTech revolution.

The aim of RegTechs is to solve compliance and regulatory issues that exist not just in finance but across all sectors. RegTech helps close the gap in the markets, increase efficiency and reduce costs.

The recent wave of new regulations that are being put into place are the reason for the increases demand in RegTech. Two examples of these are the new GDPR regulation that has been put in place to protect personal data and MiFID II, the new financial regulatory system.

The Need for RegTech in Trade Finance

Within Trade Finance there are multiple other sectors that are involved. Because of this there more multiple organisation, regulations and sanctions that firms have to be compliant with for a successful transaction without a hefty fine. This leaves a lot of room for error while the process of scrutinising remains manual.

Trade Finance involves more than just financial documents that require compliance. Documents I believe can be split into five sections: Financial, Insurance, Commercial, Transport and Official documents.

The Regulatory Boards

There are multiple regulatory boards that Trade Finance Banks, Travel companies and suppliers have to be compliance with. As well as following financial boards and specific country regulations, firms also have to make sure documents pass Anti-Money Laundering (AML) and Terrorist screenings.

The entire process is still processed manually. Banks are relying on human knowledge to comb through mounds of documents which can take hours. Humans can’t scale and rapidly repeat tasks like machines.

Here are some examples of the boards:
Compliance
  • Uniform Customs & Practise for Documentary Credits (UCP 600). This is a set of rules agreed by the International Chamber of Commerce (ICC) which applies to all institutions that issue Letter of Credit.
  • International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP) is the set of rules agreed by the ICC that sets the guidelines for the examination of documents that are associated with Letter of Credit.
Sanctions
  • Anti-Money Laundering (AML) – These are rules and procedures put in place to prevent punish illegal actions such as tax evasion, market manipulation or the trade of illegal goods.
  • Terror Lists – Screening whether firm are potentially financing terrorist organisations or nations.

The Problem

There are many issues with the current state of being compliant with regulatory boards. The entire process is still manual and paper-based. This means that the entire process is currently inefficient and likely to lead to human error.

The current scrutiny of documents against regulation is all processed manually by key individuals. The process itself takes multiple hours to do correctly which still does not guarantee 100 % compliance.

It is a costly and time-consuming process, beset by inefficiencies and repetition. Bain & Co estimate governance, risk and compliance spends account for 15-20% of the total “run of the bank” cost base of most major banks, and this cost is rising with the annual volume of regulatory changes, publications and announcements rising 492% from 2008-2015 (Boston Consulting Group).

Traydstream’s Solution

Traydstream’s contribution to ‘RegTech’ includes our Rules and Compliance Checking Engine. This comes as our 2nd step in our three-step modular approach to the digitisation and automation of trade finance.

Once Traydstream’s Optical Character Recognition Engine (OCR) has digitised trade documents into machine-readable format, the Rules and Compliance checking engine can start applying a series of machine learning algorithms to scan and scrutinise the electronic documents for compliance with international trading rules and regulations. The machine learning technology Traydstream is built on thrives on volume and variety, its efficacy improving over time.

Conclusion

Trade Finance currently has a $1.5 trillion gap. Boston Consulting Group (BCG) estimate banks have faced cumulative financial penalties of roughly $321Bn since 2007-2016. RegTech and Traydstream offers the solution with AI and Machine Learning Technology.
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